Qualifications for Getting Tax Deductions When Working from Home

Tax deductions from working from home
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Working from home can be an excellent experience for home-based employees. It can give them the flexibility to do their work from anywhere they choose and still provide the same level of performance as those who work in traditional office settings.

If you’ve worked from home during 2022, you might be able to claim the work from home tax deduction. You might claim a $1,500 deduction for qualifying workspace expenses, as well as continue deducting unreimbursed business expenses when they exceed 2% of the taxpayer's adjusted gross income (AGI). 

The Tax Cut and Jobs Act (TCJA) from 2017 includes some changes to this deduction, making it more favorable for many self-employed individuals going forward. In this article, I’ll discuss the qualifications and details of the Tax Cut and Jobs Act work from home deductions.

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How Do I Qualify for the Tax Cut and Jobs Act?

To qualify for the tax cut and jobs act, you must satisfy two basic criteria. You must conduct business on a regular basis at a specific location, and the property must be your primary workplace. As of 2018, you must be self-employed to qualify for deductions.

These include an area used as a place of business or for storage if it's located within the same structure as the living area. When filing an amended return (Form 1040-X) for the tax year in which you can make this claim, make sure to include it on line 1.

The next thing to note is that the 2% deduction threshold is now expanded. This means that your unreimbursed business expenses are still deductible even if they exceed 2% of your AGI. 

It will be up to the IRS to decide what types of expenses qualify for this deduction. However, until it releases additional guidance on this subject, you should assume that any expenditure incurred during the course of employment qualifies as a deductible business expense.

Setting Up Your Home Office

To be eligible for the deduction, you must meet two requirements: 

  • Your primary place of business must be at home. 
  • The office must be used exclusively and regularly because you perform administrative or personal services there. 

If you work for an employer from home, you no longer qualify for these deductions, as you must be self-employed.  Your office must be your primary place of business to qualify for the deduction, and cannot be merely a side business or other enterprise that you engage in on the side. 

For example, if you're an accountant who works for several regional firms and does tax return preparation as a sideline, it wouldn't meet the requirements since this is not your primary business.

If you conduct administrative or management activities at home that do not involve performing services or managing employees, the expenses related to the workspace will not qualify for the deduction. 

This means things like bookkeeping and record-keeping do not count. 

But research and product development are included because they contribute to earning income at your regular job. By contrast, an employee may deduct unreimbursed travel expenses but only if they're related to an actual business journey.

The office must be used exclusively for your own business or work. 

This means you cannot use it for personal purposes, such as an extra bedroom that is also used as a home office. But even if you split the space with another member of your household for non-business activities, you can still claim the deduction so long as all three requirements are met. 

You can deduct expenses associated with renting out part of your house, but only if the rented area is solely set up and used for conducting your business when not in use by members of your household.

Which Business Expenses Are Deductible?

The business expenses that are deductible from your taxable income include:

  • Rent or lease payments for the workspace that is part of your home.
  • Utilities such as electricity, gas, and cleaning services are also used in running your office.
  • Property insurance on property used for work purposes only.

When it comes down to actually itemizing deductions on Form 1040 Schedule A, all of these items are deductible. As an additional deductible expense, depreciation of the workspace itself is based on its estimated useful life. 

This amount must be reduced by any section 179 deduction, or first-year expense deduction claimed on the property. 

Improvements you make to a rental property may qualify as a deduction if their main purpose is business use. But improvements made to suit personal needs do not qualify, while those required because of a change in the way business was conducted did meet this standard. 

If you make improvements, the amount you can deduct is generally the lesser of the increase in value or the cost of making it.

Additional Business Deductions

Additional qualifying areas are cell phone expenses and rooms rented to others by the taxpayer on a lodging-by-arrangement basis or at least one specific part/room used exclusively to conduct business.

Expenses that qualify include: 

  • Furniture
  • Repairs
  • Supplies and other expenses that are used in these spaces.

The section must be dedicated exclusively for use in business activities. You cannot deduct expenses related to other family members' living areas, even if those spaces are created or acquired as part of a business plan.

Other qualifying areas related to home offices that can be deducted include:

  • Utilities such as electricity and gas for your office, and any attached facilities like a garage.
  • Property insurance premiums, but only for the portion of the property used exclusively in an office.
  • Acquisition costs, such as architectural plans and building permits, if required because of changes in business activities or conditions at the site.
  • Certain expenses for parking you use exclusively for business purposes, but not general commuting costs.  
  • Qualifying transportation costs such as bus, taxi/limo, subway, commuter train.
  • Parking fees.

Bottom Line

The Tax Cuts and Jobs Act passed into law at the end of 2017 has ushered in some significant changes that will affect many Americans going into 2022.

One such change is an expanded workspace deduction which could make it more favorable for many self-employed individuals going forward. 

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